What Will Be Covered… · • What Is RCA (Highlights)? • What Does Implementation Entail? 8 8 8 Alta Via Consulting, LLC RCA’s Foundation RCA – a made-in-the-U.S. approach

111 Alta Via Consulting, LLC

Presented By: Dawn Sedgley of Alta Via Consulting

Keys for Successfully Implementing

Resource Consumption

Accounting (RCA)


What Will Be Covered…

• Why Implement RCA?• What Is RCA (Highlights)?• What Does Implementation Entail?


Why Implement RCA?Finance Officers’ Current Satisfaction

The CAM-I RCA Interest Group Survey


Why Implement RCA?Inability to Make Business Decisions for:• Capacity Management –

• When, where, how much, cost of idle, OT/Temp/Perm, etc.• Unpredicted wasted resources

• Optimization of Processes –• Sub-optimization of a manager’s specific area,• Inability to take timely or appropriate corrective actions• Arbitrary budget – ineffective performance measurement and control



Why Implement RCA?Inability to Make Business Decisions for:• Appropriate Mix Strategies – resources, products/services,

customers• Inaccurate marginal cost information, contribution, and gross margins• Complaints by managers of unnecessary over costing of products• Experienced the fixed cost death spiral

• Simulation Scenarios –• Lack of understanding of causal relationships between outputs • Make/Buy/Outsourcing mistakes• Inaccurate predictive results



Why Implement RCA?Specific Examples :

• Competitive Bidding Environment (low margin industry) –requiring accurate understanding of fixed costs for break even analysis

• External Pressure for Product Mix Shifts – impacting realignment of budget/plan

• Greenfield – start with the best from the beginning

• Curiosity – pilot implementation for profit optimization/product cost adjustments.

• Internal Need for Justification – poor demand planning on internal customer organizations driving fluctuating full absorption allocations






RCA’s Foundation

RCA – a made-in-the-U.S. approach – combining the best of continental European and U.S. practices into a new cost

management approach

• Principles from the dominant cost management approach in German-speaking Europe – Grenzplankostenrechnung(GPK) – has been integrated into RCA

• GPK is essentially a well developed and sophisticated standard costing system, adopted by more than 2,300 companies

• RCA also integrates the improved analytical and process/activitymanagement view of ABC/ABM

©© Copyright Copyright RCAinfo.comRCAinfo.com


A Monetary View of Operations

• Tight integration between logistics and management accounting

• The logistics view and the cost view are two sides of the same coin

• The level of detail available to logistics is also available to costing



The Basics of RCA

• 1) The view of resources – a specific resource definition. Emphasizes resource interrelationships and attributable resource costs information.

• 2) The quantity structure – causal relationships are expressed as relationships between input and output quantities – not money

• 3) The view on consumption and cost behavior – tracks fixed and proportional costs through all relationships



Basics #1: View of Resources

ResourcesDevelopment/R&D

Products and services

Sales and marketing

Support

etc., etc.

Investment

• Resources are the focus but not to the exclusion of other analytical dimensions

• There are multiple cost objectives of an RCA model beyond the resource elements & pools, such as; processes/activities, jobs, products, services, customers, strategic goal, etc.



Basics #1: View of ResourcesResource Elements and Resource Pools:

RCA recognizes resource elements as the smallest denominator in the cost

model. Related resource elements are group together in a resource pool

and associated with a quantified resource pool output measure. Resource

elements can be both monetary ( i.e. Cost elements) or quantitative (i.e.

utilization statistics, other output consumed, etc.)

Resource Pools

Resource Elements

Ex. HR Ex. HR LabhrLabhr, Line , Line MachrMachr, , Facilities SQFTFacilities SQFT

Ex. Salaries, Ex. Salaries, Depreciation, Electricity, Depreciation, Electricity, Internal Support CostsInternal Support Costs

CAM-I CMS Group4th Quarterly MeetingSan Diego, CA.


Basics #1: View of ResourcesCapacity Resides on the Resource:

Resources are the entities invested in to establish capacity. The approach

in Resource Consumption Accounting is to manage capacity on the

resource. Excess/Idle capacity has always been and will always be a

matter of idle resources. Excess/idle capacity is viewed as a variance

and highlighted as such in product P&L’s. Full absorption of costs to the

lowest level product is not practiced.




The potential for 1:n relationships.

If a Process/Activity object is utilized within an RCA model it is viewed as utilization of capacity only, not the owner of capacity. This is due to:

The diversity of Units of Measure.

The potential for n:1 relationships.

CAM-I CMS Group4th Quarterly MeetingSan Diego, CA. (Adapted)



In RCA These difficulties do not exist because:

Measurement occurs on the resource through a quantified resource

output measure.

Excess/Idle capacity is unambigiously isolated on the resource.

Due to a single homogeneous unit of measure the fruit basket problem

does not exist.



Basics #2: Quantity Structure

Human Resources

Procurement

Production Line 1

Facilities

Plant Maintenance



Basics #2: Quantity-Based

An approach to reflecting economic activity that is entirely predicated on the logistical quantity flows in an enterprise

Causal relationships in RCA are expressed in output unit to output unit quantity standards. For example, the relationship between a machine hour and the electricity (KwHs) that the machine consumes.

KwHs to Mach.Hrs = 200:1




functions of the invested resource base.

first and foremost quantity-based – not value based.

a relationship that is an output (provider) to output (consumer) relationship.

often reciprocal/simultaneous.

dynamic,

Influencers of the nature of cost as ouput is consumed

Relationships of Resources to Consumers are:



Basics #2: Quantity StructureFully Burdened Resource Costs are Required to:

Gain insight into the true cost of capacity.

Gain insight into the total cost of providing a internal service.

Accurately cost products and services.

Help make sensible make-buy decisions.

Help make sensible outsourcing decisions, capacity ripple effect.


Human Resources

Procurement

Production Line 1

Facilities

Plant Maintenance



• The principle of resources as the actual consumers, also existsinconjunction with activities/processes

• Obtaining resource attributable costs while maintaining the process/activity view of costs

- Quantity Consumption with Values

- Resource Interrelationships - Activities Consumed by the Resources that the Services are Provided for

- Activities Consumed by a Cost Objects

# of# of

# of# of

# of# of




$

$

$ $

Process/Activity to Process/Activity relationships would not be modeled since the resource pool is overlooked causing several issues:

11

33

Complexity – a single relationship becomes multiple relationships.

Compromise – in order to simplify the cost model, relationships become

approximations introducing errors.

Inaccuarcy - fully burdened resource costs are not provided.



Basics #3: Consumption & Cost Behavior

RCA recognizes two important and fundamental principles of consumption and cost behavior (the nature of costs)

Resources

Investment

Cost characteristics (Fixed/proportional)

inherent to the resources deployed

+The influence of quantity flow

(fixed/proportional consumption) characteristics on these inherent

resource cost characteristics

KwH’s to Mach.Hrs = 200:1



The Nature of Cost Remains

Fixed.

The Nature of Cost Changes

to Fixed.

The Nature of Cost Remains

Fixed.

The Nature of Cost Remains Proportional.

The Result is: $ 1,500

FixedExpense

Proportional

@: $50/MwH

Fixed @:

$100/MwH

Proportional

@: $50/MwH

Fixed @:

$100/MwH

The Result is: $ 750

FixedExpense

The Result is $ 18,400

FixedExpense

The Result is $ 9,200

ProportionalExpense

Scenario 1

Scenario 2

Scenario 3

Scenario 4

and the Initial

Inherent Nature of Cost, As

Expressed in the Unit

Output Rate, is...

and the Initial

Inherent Nature of Cost, As

Expressed in the Unit

Output Rate, is...

A Fixed

Quantity of:

15 MwH’s

The Resource Output

Quantity Consumed

by the Furnace

is...

The Resource Output

Quantity Consumed

by the Furnace

is...

A Proportional

Quantity of:

184 MwH’s

Basics #3: Consumption & Cost Behavior



RCA Advantages

• Primary principles have been around for decades and are well accepted in the management accounting community

• Finally, a solution that settles the age-old debate of fixed and variable/proportional

• An approach to management accounting that provides both accurate marginal and attributable cost information

• Apart from unambiguous decision support information, RCA also plays a significant role in organizational processes like planning/budgeting and performance measurement

• Key to an enterprise’s proactive stance to address internal and external changes


RCA Basics Highlights

• Effective management and conversion of Resources is the key for management decision making

• Resource Pools provide the view necessary for capacity management as capacity resides at the Resource Pool

• Stringent definition of Fixed/Proportional as defined within the relationship view not a time dimension or based on type of decision

• Supply/Demand economic view of causal quantity relationships and the consumption of the resource pools

• Multiple cost objects (intermediate and final) are incorporated in an RCA model; resources, resource pools, process/activities, jobs, products/services, customers, etc.





What Is Different This Time?

• We have all learned from initiatives over the last 20 years

• RCA is not new – fundamental principles have been implemented thousands of times over the last 60 years

• RCA is fully compatible with the revised IFAC (International Federation of Accountants) statements on management accounting

• Professional bodies (IMA) in the United States are involved


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Project PlanScope DocumentProject CharterSteering CommitteeEtc…

RCA Conceptual DesignKey Data StructuresEnvision ProcessesSpecificationsEtc…

Prototyped Cost ModelProcess DocumentationPolicy/Procedure ImpactsTesting ScenariosEtc…

Live SystemUtopiaEtc…..


Where Do We Begin? (Conceptual Scope)

Current Management Accounting Systems



RCA Implementation – Scope/Charter

• Key #1: Appropriate Owner - C level champion is required and often multiple C level owners are involved due to changing the underlying framework of how information is generated across the organization

• Key #2: Manage Expectations - Perform impact assessment and risk analysis.

• Key #3: Staff Correctly - This is not a financial endeavor. Usually more involvement is required from operational managers than from financial analysts, so project staffing mix is important.

• Key #4: Be Realistic - Time drives scope. Assignment methodologies are impacted when cutting over to an RCA framework.

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• The dynamic aspect of RCA is due to the cost model being reflective of the operational environment. To develop the conceptual design of the operational model, decompositions of the organizations must take place.

• The decomposition breaks down the organization resulting in:Key Data Elements: Resources, Resource Pools, Capacity Measures, Cost

Objectives/Objects, etc.Supply/Demand quantity relationships are modelled in an effort that is akin to

an Industrial Engineering exercise to develop standard consumption relationships

• Multiple management processes are altered/redesigned; planning cycles, performance parameters, actual tracking, reporting, etc.


RCA Implementation – Conceptual Design

• Key #5: Alignment - The RCA model’s conceptual design must be tied to organization strategies and performance measures

• Key #6: Front-Line Manager Participation - This provides an accurate reflection of the environment, awareness of the change management aspects involved, and buy-in from those that will later be receivers of the information

• Key # 7: Over Estimate - Development of the Conceptual Design is the easiest activity to underestimate for an implementation. When determining the scope, overestimate the time required for this phase.

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RCA Implementation - Realization

• Realization is conversion of a paper/theoretical model into a sustainable technical platform(s)

• Varying systems are potentially altered, such as logistics, organizational, planning, management decision reporting, etc.

• Policies/Procedures are updated for areas within the management control cycle: planning, actuals, projections, reporting, corrective actions, variance justifications, etc.

• Iterations/alterations of the conceptual design will occur as the model is converted into a system

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RCA Implementation - Realization

• Key #8: Communicate Often – Scope and statuses should be clearly communicated at least on a monthly basis especially to support areas to manage expectations and identify issues

• Key #9: Change Management is Crucial – RCA is about responsibility accounting and therefore will impact the culture of an organization. These impacts must be managed throughout the implementation not acknowledged at go-live.

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RCA Implementation - Testing

• Key #10: Test Everything – Especially the results.• Testing encompasses:

Unit testing of the model, interfaces, new or altered systems, etc.Integration testing to ensure all the pieces now make one partUser Acceptance testing to obtain the end user’s sign-offStress/Volume testing to ensure system performance standards have

been accommodatedFinal determination of impacts to management decision support

capabilities

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• Key #11: Start Training Immediately – Training usually occurs at the end of an implementation. Given that RCA changes the information provided, training is wider in scope.

• Multiple types of training are necessary: • Management training is provide in organizations where there is not a clear distinction between Financial versus Managerial Accounting• System maintenance training occurs to ensure that the organization has the knowledge in place to continually support the model• End User processing training for the users that will enter or access the data directly from the system• Conceptual Training to manager’s to ensure they understand how to make appropriate decisions on the new information generated from the framework


RCA Implementation - Evaluation

• Perform a post implementation phase of Evaluation that considersthe results of the shift to RCA.

• For organizations that are utilizing a phased approach, determine next area for expansion of the framework.

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Implementation – Highlights

• Make a clear conceptual separation between internal and externalaccounting requirements

• Tie conceptual design to organizational strategy, performance measurement, and reward systems

• Get top management buy-in• Use the management accounting initiative to drive change• Management accounting system is management’s system not

financial’s system• Project will have important change management/integration component• Balance information requirements with system maintenance• How managers analyze and use information will ultimately determine the

effectiveness of an RCA initiative


RCA Resources

• Books:“The 123’s of ABC in SAP,” Dawn Sedgley and Chris Jackiw, for its quantity-based illustrations of ABC – a key feature of RCA

• Case studies:Airengines – on RCAinfo.com.Clopay A Plastics Extrusion Company – Strategic Finance magazine 10/2004 issue or the IMA’s Web site

• Web sites:http://www.rcainfo.com – a free subscription service on Resource Consumption Accountinghttp://www.altavia.com – a public library is available with articles and white papershttp://www.imanet.org – the Institute of Management Accountants – a discussion database/email exchange dedicated to GPK and RCA (Note: You would have to subscribe to the IMA’s List Server)


Your Turn!

Questions?

How to contact me:[email protected]

Alta Via Consulting, LLC

Documents

What Will Be Covered… · • What Is RCA (Highlights)? • What Does Implementation Entail? 8 8 8 Alta Via Consulting, LLC RCA’s Foundation RCA – a made-in-the-U.S. approach